Items Tagged With inflation

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The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 5 percent.

Economic growth has been quite strong so far this year. The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.

As yet, the run-up in the prices of energy and other commodities appears to have had only a modest effect on core inflation, ongoing productivity gains have helped to hold the growth of unit labor costs in check, and inflation expectations remain contained. Still, possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.

The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information. In any event, the Committee will respond to changes in economic prospects as needed to support the attainment of its objectives.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen.

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 6 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco.

The news from the Latin American continent, meanwhile, is good. Mexico recorded increased industrial production while the Brazilian real touched 5-year highs. Argentina’s economy expanded at the fastest in 13 years. Soaring exports and rising consumer spending were the reasons for this. The nation’s economy expanded 9.1 percent in the fourth quarter compared to the same period a year ago.

At the same time inflation for the period doubled to 12.3 percent. Argentina is South America’s second-largest economy. The government is expected to cut spending and freeze wage increases so as to curb inflation. Multinational companies in the country are also being urged to stop price increases.

One of the concerns in the past few days has been the nation’s housing market. Fed officials admit that the sector is cooling down but rule out any need for concern. The stand is that the growth of the US economy will sustain consumer spending which in turn will stabilize the housing market this year. This is expected to offset losses incurred due to rising energy costs.

Some economists give a contradictory opinion. But most believe that inflation will stay within bounds and help balance out the market. Incomes have increased and so has the number of jobs. The Fed says that the decline in housing market is not uniform and high prices in one area smooth out the lows in another part of the country.

Inflation in the United Kingdom stayed below the 2 percent target set by the Bank of England for January. This has led to investors predicting a reduction in interest rates. Inflation was popularly expected to touch at least 2.1 percent. Indications that consumer spending may not rebound sufficiently enough to raise growth from a 13-year low is more reason to believe a cut in interest rates may be on the anvil.

Prices dropped 0.5 percent for the same period with furniture and household equipment leading the way. Clothing and footwear followed close behind with a fall of 4.1 percent. Inflation would have been lower if energy and transport prices had not soared. Cost of transportation increased 0.5 percent. Bloomberg reports:

“The figures continue the recent run of reports suggesting that underlying inflationary pressures remain muted,” said Nick Kounis, an economist at Fortis Bank in Amsterdam. “They suggest the bank does have room to cut rates if growth disappoints going forward.”

Just as everything seemed to be stabilizing on UK’s economic front, retail sales figures tell a different story. Figures released today indicate consumers have decreased spending in the New Year. Annual increase in sales was 1.3 percent, the lowest in more than a year. Most major retailers in the region have reported significant decline in sales.

The UK is Europe’s second-largest economy after Germany. Just yesterday the Bank of England had revised its growth forecast to beyond 2.7 percent. It had also indicated that inflation would stay within the 2 percent target for the next two years. House prices, meanwhile have increased for a third straight month in January.

The dollar rose on Wednesday though the new Fed Chairman’s remarks failed to meet expectations. The currency which began the week on a high note had steadied yesterday but went up again as Bernanke’s testified in Congress indicating possibility of further interest rate hikes to combat inflation. The current interest rate is at 4.5 percent. The US economy has been expanded for the past five years and unemployment is at a low of 4.7 percent.

However, the country’s housing market has slowed down to its lowest in almost two years. This figure is expected to go lower in the next few weeks. Soaring energy prices are also seen as a major risk factor pushing up inflation. Oil has gained more than a third over the past one year while gas prices are up by at least 20 percent for the same period.

It was a good day for the British pound as the Bank of England (BoE) ruled out possibility of interest rate cuts in the near future. An inflation report by the BoE indicates inflation will stay within bounds for the next couple of years. It was a relief for the traders who had been affected by recent uncertainty over interest rates as BoE members disagreed during board meetings over the stance to be adopted.

As a result the pound gained 0.3 percent. Interest rates in UK are on par with those in the US at 4.5 percent. High energy prices have been a major factor in pushing up inflation globally and the UK is no exception. A report by the BoE also indicated the region’s GDP might increase slightly in the next few months.

Euro zone growth is seen to be gradually getting stronger. But along with the good comes the bad and in this case it is inflation that is predicted to increase. European Central Bank (ECB) President Jean-Claude Trichet said euro zone growth in the fourth quarter was at 0.3 percent. Though this is low, it is attributed to seasonal volatility.

Inflation is pegged to rise mainly due to rising costs of energy. At the same time, money and credit growth are expected to progress well. The ECB will keep an eye on the situation and monitor it as required. An increase in inflation might only be short term.

For a few weeks, currency traders and economists, alike, waited with baited breath for America’s Federal Reserve Bank to release the ‘minutes’ from its most recent meeting. Upon their release, USD bulls responded with joy, as the minutes seemed to suggest that multiple rake hikes will ensue. Previously, many economists had expected the Fed to raise interest rates only one more time as part of the current cycle of tightening. The latest forecasts, however, indicate that an almost certain rate hike in March will be reinforced by further rate hikes in the following months. In short, it looks like the interest rate differential between the US and the rest of the world will continue to widen. Reuters reports:

New Fed Chairman Ben Bernanke has commented extensively on monetary policy, indicating that the Fed would be vigilant in holding down inflation expectations.

Inflation in Germany for March was at its lowest since August 2005. The rate of inflation was 1.9 percent as against 2.1 percent in February. Inflation in Germany has stayed above the European Central Bank’s 2 percent target for the past six months. Economists had predicted such a possibility in Europe’s largest economy.

The ECB has raised interest rates twice in the past six months and indicated it will take decisions according to the way the economy of the region shapes up. The central bank is pegged to hike rates to at least 3.25 percent this year. Meanwhile, producer price inflation in Germany for February accelerated unexpectedly to its highest in 24 years. Gas prices have risen at an average of almost 20 percent more than last year.